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Betting on Hunger

October 2, 2012

A report issued by the World Bank last month noted that world food prices over the summer returned to the level reached during the 2008 “global food crisis,” surpassing that peak by one percent. Maize and soy prices were particularly affected, increasing by 25 percent and 17 percent respectively between June and July. These fluctuations have been transmitted to individual countries, often in uneven ways. Over the past year, maize prices have increased by 174 percent in Malawi and by 129 percent in Mozambique. Wheat prices in Sudan have increased by 52 percent.

Prices have retreated slightly in recent weeks, as the American corn harvest turned out to be not as poor as predicted. However, global prices continue to remain near record highs, as the figure below illustrates. And the world’s poorest remain most vulnerable to continuing price shocks.

World Bank Food Price Index

A joint report issued by the Food and Agriculture Organization, the International Fund for Agricultural Development, and the World Food Program last month called for “swift coordinated action” to address the emerging crisis. Their report notes that the food price spikes over the past five years have been driven by a number of factors, including weather, diversion of food crops to non-food uses, and financial speculation. Their call for action centers on several key proposals:

  • Supporting long-term investment in agriculture, particularly smallholder agriculture.
  • Expanding agricultural production, particularly in developing, net-food-importing countries.
  • Improve market access and reduce risk for smallholder farmers.
  • Maintaining and expand safety nets to ensure poor food consumers avoid hunger.
  • Encourage states to avoid policies which exacerbate food price shocks, such as panic buying and imposing export restrictions.
  • Review and adjust policies encouraging alternative use of grains, such as for biofuel production.

What is interesting about this list is that it addresses only the first two of the three causes they note; missing from the policy recommendations are any substantive efforts to curb speculation in agricultural commodities. Yet an outstanding analysis by the New England Complex Systems Institute found a direct connection between speculative investment and food price shocks over the past seven years. They concluded that, “The results show that the dominant causes of price increases are investor speculation and ethanol conversion. Models that just treat supply and demand are not consistent with the actual price dynamics. The two sharp peaks in 2007/2008 and 2010/2011 are specifically due to investor speculation, while an underlying trend is due to increasing demand from ethanol conversion.”

In other words, the diversion of food crops to fuel production is behind the general upward trend in food prices since 2004. Speculative investment, however, is the primary driver of price shocks, particularly during the global food crises. Drought and weather, meanwhile, are at best of limited explanatory power.

Some financial speculators have been clear about this. Recently, the Director of Agricultural Trading for the world’s largest commodities trading firm, Glencore, described the global food prices as a “good” business opportunity. He said, “The environment is a good one. High prices, lots of volatility, a lot of dislocation, tightness, a lot of arbitrage opportunities. We will be able to provide the world with solutions… and that should also be good for Glencore.” Food price shocks, in other words, are good for business, if not for the world’s poor.

A report by Foodwatch, entitled “The Hunger Makers” details how speculative investment drives global food prices. While noting that commodities markets need investors and futures contracts, the nature of those investors and futures have changed dramatically over time. In 2000, between 70 and 80 percent of futures contracts were tied directly to crop production, usually as hedges against future price fluctuations. By 2006, hedging represented only about 20 percent of positions in agricultural commodities. The remainder are held by speculators, betting on prices changes. Billions of dollars were flowing into agricultural commodity markets, competing with producers seeking to hedge their positions. This drove prices dramatically upwards.


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